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The Existence of Informationally Efficient Markets When Individuals Are Rational

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  • Muendler, Marc-Andreas

Abstract

A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price-contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating functions, this paper shows that individual investors en- dowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the ex- pected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without informa- tion acquisition are Pareto efficient.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt5tf543q2.

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Date of creation: 01 Aug 2004
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Handle: RePEc:cdl:ucsdec:qt5tf543q2

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Keywords: Information Acquisition; Information and Market efficiency; Asymmetric;

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References

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  1. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 360, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  3. Citanna, Alessandro & Villanacci, Antonio, 2000. "Existence and regularity of partially revealing rational expectations equilibrium in finite economies," Journal of Mathematical Economics, Elsevier, vol. 34(1), pages 1-26, August.
  4. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
  5. Jordan, J S, 1983. "On the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 51(5), pages 1325-43, September.
  6. Routledge, Bryan R, 1999. "Adaptive Learning in Financial Markets," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1165-1202.
  7. Admati, Anat R., 1991. "The informational role of prices : A review essay," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 347-361, October.
  8. Jackson, Matthew O, 1991. "Equilibrium, Price Formation, and the Value of Private Information," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 1-16.
  9. Romer, David, 1993. "Rational Asset-Price Movements without News," American Economic Review, American Economic Association, vol. 83(5), pages 1112-30, December.
  10. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  11. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
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Cited by:
  1. Muendler, Marc-Andreas, 2005. "Rational Information Choice in Financial Market Equilibrium," University of California at San Diego, Economics Working Paper Series qt5q4764nj, Department of Economics, UC San Diego.

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